Prescribed Rates & Luxury Taxes – How CRA’s New Regulations May Impact You
The impact of rising interest rates is being felt by many Canadians and has resulted in higher costs for all of us in many ways. With the United States Federal Reserve having raised interest rates by another 0.75% in September, The Bank of Canada will be following suit with a rate increase in the near future to protect the dollar from sell-offs in favour of US currency. One of the impacts of the interest rate increases seen so far is Canada Revenue Agency increasing the prescribed rate to 3% effective October 1st 2022. The prescribed rate is attached to the average 3-month treasury bill, meaning that when interest rates rise enough, the prescribed rate will as well, and it may be possible that the rate increases again in the new year
For those of you with existing spousal loans or other loans based on the prescribed rate, your interest payments will not be affected, however any new loans based on the prescribed rate will be under the new rate. In addition to this, the interest charged by CRA on late tax payments is always 4% above the prescribed rate, meaning that as of October 1st, any outstanding tax balances with CRA will be charged at 7% interest, and this particular interest charge is not tax deductible.
But wait…There’s more!
Beginning in the new year, the Select Items Luxury Tax will come into effect. As such, if you’ve been looking at purchasing or leasing a new car, boat or aircraft, it may be wise to do so before year end. Starting January 1st 2023, automobiles and aircraft costing more than $100,000 or vessels costing more than $250,000 will be subject to luxury tax the lesser of 10% or 20% of the difference between purchase price and the tax threshold. Any modifications or adjustments made to the purchase as well as transportation costs, excise tax and other associated costs will be factored into the cost for luxury tax calculation as well. Furthermore, the luxury tax will be included in the cost of purchase prior to HST being added. This means that if you wanted to buy a vehicle with MSRP of $150,000, your new price would be as follows:
Luxury Tax: Lesser of 10% purchase price OR 20% ∆ between purchase and threshold
$150,000 x 10.00% = $15,000
[$150,000 – $100,000] x 20.00% = $50,000 x 20.00% = $10,000
New Purchase Price: [Purchase price + Luxury Tax] + Tax (13%.00 ON)
[$150,000 + $10,000] + 13.00% = $180,800
The silver lining to this new luxury tax imposed by the federal government is that most motorhomes, and the purchase or lease of all second-hand vehicles, vessels and aircraft are exempt.
While the luxury tax classification for vehicles is straightforward, the classification of luxury vehicles for vessels and aircraft applies as follows:
- Recreational vessels including but not limited to yachts, sailboats and motorboats built after 2018 with commercial watercraft and floating homes being exempt
- Personal aircraft including but not limited to airplanes, gliders and helicopters built after 2018, with only commercial aircraft being exempt
For further information on the Select Luxury Items Tax Act, feel free to reach out to Adam Prittie who can assist you with calculating the tax impact of your purchase
Written by: Adam Prittie, BCom, CIM